Every secured loan is built on the relationship between the money borrowed and the asset behind it. For a logbook loan, that asset is your vehicle, and the measure lenders use to describe the relationship is called loan to value.
V5 Solutions has broken the topic down into three stages: valuing the vehicle, working out the ratio, and checking affordability. Understanding each one will help you set realistic expectations before you apply.
Stage One: Establishing What the Vehicle Is Worth
A lender needs a reliable valuation before it can decide anything else. This is normally based on the price the vehicle would be expected to fetch in a sale, which tends to sit below the retail prices you see in dealership adverts. The figure takes account of:
- The vehicle's make, model and specification.
- The year of registration and the recorded mileage.
- Its general condition and any visible wear or damage.
- Maintenance records and MOT history.
- Current market demand for similar vehicles.
Two vehicles of the same model and age can therefore be valued quite differently. A well-kept example with full service history will usually be worth more than a high-mileage one with gaps in its records.
Stage Two: Calculating the Loan to Value Ratio
Loan to value expresses the loan as a percentage of the valuation. To calculate it, divide the amount borrowed by the vehicle's value and multiply by 100.
Here are some worked calculations. They are illustrations of the arithmetic only, not lending criteria.
- Vehicle value £7,500, loan £1,500: 1,500 ÷ 7,500 × 100 = 20% LTV.
- Vehicle value £15,000, loan £6,000: 6,000 ÷ 15,000 × 100 = 40% LTV.
- Vehicle value £30,000, loan £18,000: 18,000 ÷ 30,000 × 100 = 60% LTV.
The portion of the vehicle's value that is not borrowed against is sometimes described as your equity. A lower ratio means more equity and less money owed relative to the asset.
Why Do Lenders Care About Loan to Value?
Vehicles depreciate. A car worth a certain amount today will generally be worth less in a year or two. By lending a proportion of the value rather than the whole amount, a lender allows for that decline over the term of the loan.
The ratio also reflects risk from your side. Borrowing a smaller share of your vehicle's value reduces what you owe, the size of your repayments and the overall interest you pay. It is a good reason to borrow only what you need, even if your vehicle could support more.
Does the Ratio Change During the Loan?
Yes, in both directions. Each repayment reduces the balance you owe, which pushes the ratio down. At the same time, the vehicle continues to lose value through age and mileage, which pushes it up. In most cases the balance falls faster than the value, so your equity grows as the loan progresses. It is one reason why requests for additional borrowing are assessed afresh, using an up-to-date view of the vehicle and your circumstances.
Stage Three: Checking What You Can Afford
A valuation sets the upper limit, but V5 Solutions will only lend an amount you can repay without hardship. Our underwriters review your bank statements and phone you to discuss your income and outgoings. If the repayments on the maximum amount would stretch your budget, we may offer less or decline.
Some other points to keep in mind:
- Loans range from £1,000 to £50,000, over terms of 18 to 60 months.
- The vehicle must be registered to you and free of outstanding finance.
- Bad credit is considered, because the decision looks at more than your credit score.
- A soft search gives you a personalised quote with no effect on your credit score.
To see how a loan would progress from quote to final payment, read our article on how logbook loans work behind the scenes. You will find answers to other common questions in our logbook loan FAQs, and the representative example on our logbook loans page.
Borrowing against your vehicle is costly and carries real risk. This article is general information, not financial advice. If you are struggling with existing debts, free advice is available from National Debtline and Citizens Advice.
Your car may be repossessed if you do not keep up repayments on a loan secured against it.
